Postcards: Six Rules for Negative Momentum

This might not last long, but the selling on the S&P 500 and the negative turn on the MACD have us plundering into the red for the first time since April. Hedge. ͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­ Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Postcards: Six Rules for Negative Momentum]( This might not last long, but the selling on the S&P 500 and the negative turn on the MACD have us plundering into the red for the first time since April. Hedge. [Garrett {NAME}]( May 29   [READ IN APP](   Dear Fellow Expatriate, We’re in an ugly situation where little works in the market except for NVIDIA (NVDA), squeeze candidates, and a handful of buyout names. Volume is EXTREMELY low. Even though OPEC+ announced plans to keep production cuts in place, oil stocks are dropping. More investors are worried about the upcoming PCE number this week, and we’re pressing a rather ugly technical shift on the MACD after last week’s turnout of overbought conditions. Remember these six rules if we’re still red at the end of the day. Rule 1: Cash Is Your Friend You want to have a solid cash balance when momentum turns negative. In my trading account… I move to heavy cash. In my long-term investment? I stay calm. I’m out of long positions and position my cash for buying opportunities. Since I’m an active trader and investor, I focus on key technical levels that allow me to focus on new entry points. The move to negative momentum is very important as I protect as much capital on the balance sheet as possible. This is how I can buy for a dollar and sell for two dollars multiple times yearly. Rule 2: Don’t Sell Puts, Unless… See Rule 6 If I find myself selling put spreads as an entry point, now is not the time for me to open new positions… If I sold previous cash-secured puts or put spreads, I entered this with the mindset that I was willing to buy the stock at a lower price. If I’m up in my current position, now would be an excellent time to take profits. If I’m down, now might be the time to assess whether I want to sell spreads at an even lower price. When momentum goes negative, selling can be indiscriminate. That means nothing is safe. The last thing I would want to do is have exposure to a $50 put when a stock's downside is much lower. [Share]( Rule 3: Learn Implied Volatility Rank One of the great rules I learned from my time with tastytrade was how to know the difference between cheap and expensive options. I use a tool on tastyworks called Implied Volatility Rank (IVR). This measures the implied volatility of a stock TODAY compared to its IV during the previous 52 weeks of the year. If a stock has an IVR of 25, its implied volatility is lower than 75% of the trading days over the last year. If it’s at 80, it’s higher than 80% of the days in the previous year. The general rule is that if IVR is under 25, buying calls or puts is cheap. If it’s over 30, I might want to sell calls and puts. And if it’s elevated, that’s the time for me to do exotic trades like Iron Condors. This can also tell me which stock to trade and how to trade it compared to other ideas. Rule 4: Sell Credit Spreads in Negative Momentum If a stock is expensive to short with a long put, there are other “options.” I can sell vertical call spreads on stocks with a high IVR and benefit if the stock trades sideways or declines in value. I’d be selling someone the right to purchase a stock from me at a higher price. If the stock price falls, the underlying call will fall as well, thereby reducing the value of the call spread. I use a higher call on the trade to protect myself against any surprise upside on a stock — think a buyout or sudden momentum reversal. Rule 5: Look for Oversold Levels on the SPY and IWM Finally, the market tends to sell off fast and furious in negative momentum environments. From June 8, 2022 the S&P 500 ETF went from overbought to oversold in about seven trading days. The market was oversold after the SPY’s move on the Relative Strength Index (RSI) to under 30. Oddly enough, no one had the guts to buy stocks. The same thing happened in October 2022. We had oversold levels on RSI and MFI daily levels in early October. It happened again in December… and March too… Want to know who purchased shares in oversold conditions and made a fortune? Robots. Algorithms — which have no emotion or fear — scooped up stocks in deeply oversold conditions and kept buying for a month. This recently happened on April 19, 2024… See for yourself… This is a very predictable trend. Obviously… the inflation number this week will determine quite a bit. Rule 6: Wait… Sell Puts in Very Specific Conditions The oversold territory is also a very good place to sell puts on stocks I want to own when we’ve reached a period of “peak fear.” If the RSI on a stock is at 25, and it’s a great blue-chip company, I use the high volatility and the fear to sell puts on a stock maybe 15% to 20% lower than its current level. With that, I’m ready for battle. It’s time to trade momentum. To your wealth, Garrett {NAME} Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()